Gaming Financial Feasibility Studies

Why I chose not to use a feasibility test to adjust the potential shareable economic benefits

Financial feasibility studies consider a number of factors to determine if a real estate project can be financed and constructed. For the Aggie Square project, there are several different uses which must be studied separately: 1) the rental housing element targeting faculty, fellows and students, 2) the private office space which is the focus of innovation activities, 3) the structured parking garage which will rely on daily and monthly permit revenues from employees and visitors, and 4) retail space to support on-site residents, employees and visitors. For these market-driven uses, the following factors are incorporated into a feasibility study:

  • Land cost or ground lease terms (timing, fixed and variable amounts, escalation)
  • Property tax payments
  • Loan terms (length and interest rates)
  • Absorption rate of space
  • Rental rates
  • Length of rental agreements and guarantees
  • Credit of lessors
  • Construction costs
  • Common area maintenance costs
  • Fundraising for institutes/naming of buildings
  • Experience of developer and contractors
  • Quality of space relative to market and asking rents
  • Location of space (security, transportation access, workforce availability)
  • Property management fees
  • Future sales price of asset

After these factors are modeled, several metrics are used to determine the feasibility of a project:

  • Debt to equity ratio
  • Debt Coverage (UC recently lowered)
  • ROI (Return on Investment)
  • IRR (Internal Rate of Return)

Investors have hurdle rates for the above metrics which must be met to financially support a project. If the project as planned does not meet the prescribed hurdle rates, the project proponent can attempt to adjust one or more of the cost factors listed above to make the project financially feasible. If adjustments fail to make the project financially feasible, then a request can be made to a public agency for a subsidy. The challenge for the public sector in reviewing the cost factors is that it is difficult to know, among other things, if the project proponent is building too much space for the market or including excessive amenities. Extra space provides more potential profits if the market demand materializes, and having a public agency underwrite the risk to take that gamble is in the interest of the project developer. Extra amenities make a project more attractive to prospective tenants, and having a public agency underwrite the cost of excessive amenities is also in the interest of the project developer.

There were at least four feasibility studies of Aggie Square prior to City Council approving the final public subsidy package on September 21, 2021. The first two were conducted for UCD by a private consulting firm. These were not made public at the time they were completed in March 2018 and May 2019. The third was a feasibility study conducted by UCD’s planning consultant under contract with the City for the City. This was not made public at the time it was completed in September 2020. The fourth feasibility study was completed by UCD staff for a presentation to the UC Board of Regents on May 12, 2021. Only a summary of metrics for this final feasibility study was published. The first three studies were obtained by a public records request. The fourth study has been requested but not released.

Based on a review of the first three available documents, it is not clear that the subsidy granted to UCD by the City was based on a market-driven feasibility study. Three obvious indicators are the financing of 1) a structured parking garage sized to meet both Phase I and Phase II of the project, 2) the inclusion of a non-market-driven building in the public funding pool which will house an institute funded by an endowment, and 3) no mention of UCD reducing imputed land costs (ground lease rents) to address feasibility. If UCD has lowered their ground lease requirements, phased the parking structure and fundraised for the construction of the Alice Waters Institute, all of the property tax (an extra $30 million) could have been allocated to the CBA for Oak Park.

It is apparent that UCD gamed the feasibility studies to extract every property tax dollar for their project. For this reasons I am not using a feasibility test to adjust downward the level of shareable economic benefits in my model.